Women’s Unique Financial Challenges

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Many aspects of financial matters are unique for women; therefore, the implementation of their financial plans should take their special needs into consideration. Doing so will help them better prepare for the documented financial inequities between women and men.

If you were to guess which issue women worry about most, would you guess family, health, time, stress, or maybe equal rights? According to a March 2000 gallop poll, the answer is their finances. This response may surprise you now, but consider the following list of financial issues unique to women.      

Consider these results from a women-and-money incubator, and research by William L. Anthes and Bruce W. Most:

  • “Women are more intimidated than men about financial issues
  • Women earn less money than men
  • Women are less prepared for retirement
  • Women receive smaller retirement benefits
  • Women live longer than men
  • Women are poorer in retirement than men
  • Women are more conservative investors than men”

We would also add:

  • Special difficulties for single mothers
  • Women caring for elderly parents
  • High-deductible health insurance plans cost women more
  • Women may defer to men regarding financial decisions
  • More women manage daily family finances
  • Retirement issues because of divorce agreements
  • Male-dominated financial services industry

Earnings Differences: It is a well-documented fact that women earn less than men do. A study by the American Association of University Women Educational Foundation (as reported by Ellen Simon of The Associated Press) found that:

  • “Women make only 80 percent of the salaries their male peers do one year after college…10 years after college, women earn only 69 percent of what men earn…Even after controlling for hours, occupation, parenthood, and other factors known to affect earnings, the study found that one-quarter of the pay gap remains unexplained. The group said that (a) portion of the gap is ‘likely due to sex discrimination’…Catherine Hill, the organization’s director of research, said: ‘Part of the wage difference is a result of people’s choices, another part is employer’s assumptions of what people’s choices will be…Employers assume that young women are going to leave the work force when they have children, and, therefore, don’t promote them.’ …The organization found that women’s scholastic performance was not reflected in their compensation. Women have slightly higher grade point averages than men in every major, including science and math. But women who attend highly selective colleges earn the same as men who attend minimally selective colleges, according to the study.”
  • Anthes and Most wrote that “According to the U.S. Department of Labor, women working full-time, year-round, earn roughly 74 percent of what men earn… (and) workers in the age category of 45–54—the prime earning years for most people—women earned $516 a week while men earned $732.” It gets even worse for single mothers with young children whose “median income in 1998…was $14,248. This figure is the lowest among all family types, representing roughly one-fourth the median income of married-couples with children…and approximately three-fifths that of females with no children.”

Retirement Differences: Women are often less prepared for retirement than men. Anthes and Most also noted that “a Study by the National Center for Women and Retirement Research at Southampton College of Long Island University found that 58 percent of baby boomer women had saved less than $10,000 in a pension or 401(k) plan, while baby boomer men had saved three times that. A Scudder Kemper Investment, Inc. survey of households with incomes of at least $30,000 found that 43 percent of the men had more than $100,000 in their 401(k) plans, while only 27 percent of the women had that much.”

Investment Differences: Also, “the 1997 study by Dryfus and the National Center for Women and Retirement Research showed that women investors were more worried than men about running out of money in old age, preferred more conservative investments, wanted fixed/steady returns, were more unnerved by stock fluctuations and worried more about investment decisions… As these statistics underscore, the financial barriers and challenges faced by women are real and formidable. As one incubator participant put it, “Women are frozen in the headlights, caught in the dilemma of, ‘I know I should be doing something, but I don’t know what to do.’”

Social Security Retirement Differences: Of course, less money earned by women means less money saved for retirement or contributed to Social Security benefits, and because women live 79 years on average while men live 72, women retirees are poorer in retirement than men. Anthes and Most note that according to the Administration on Aging “…half the elderly widows now living in poverty were not living in poverty before their husbands died. The picture is even worse for older women in many minority groups.”

Retirement Summary  Because of these inequities, women have less money going into their retirement accounts (if they have one) over time, than men. In addition, the fact that women live longer than men means that they need more money in their retirement than men do.

Decision Making. The next generation of retirees may have been raised in an environment in which men handled the money decisions. More women actually pay the weekly bills, but they may have little knowledge of the larger family finances such as retirement plans, Social Security, IRAs, insurance, annuities, etc., because they may have deferred to their spouse’s decisions.

It is essential for women to understand the ‘big picture’ of their finances, especially for retirement, divorce, or death of their spouses. Because women make less than men, are less prepared for retirement, and receive smaller retirement benefits, they need to make sure that their husband’s retirement benefits will pass to them if their husband dies first. Because women may be more intimidated about asking questions of their attorney or financial advisor, they may miss crucial details (such as single-life annuity, which may bring higher levels during the husband’s life but that ends when the husband dies first), or incorrect beneficiaries on life insurance policies.

Divorce. During a divorce, women may be more concerned about custody issues and keeping the house than their future retirement and may agree to forgo the 401(k). Single parenting brings a whole host of financial challenges, including lost wages from parenting responsibilities and childcare and babysitters. If the extra expenses and possibly lower-income are not included in the divorce settlement, the single mother may find that she is unable to keep the house, and she loses the two most valuable assets: the house and the 401(k).

Health Insurance. Women not only make less money than men, their health plan may cost more (as reported by Mike Stobbe from the Associated Press). When an employer changes to a high-deductible plan, it costs on average $1000/year more for women than for men. “Women’s costs are higher because they need mammograms, the cervical-cancer vaccine, Pap tests and pregnancy related services”, said (Dr. Steffie) Wollhandler, the Harvard Medical School study’s lead author. This is unfair, but while the inequity exists, women must make an extra effort to contribute the difference to a Health Savings Account or savings program to avoid using credit to pay for the added medical bills. We have personally experienced the $4,000 deductible per year health insurance plan and, although it is better than no insurance, it can certainly make a dent in the family budget.

Care Giving. Another huge drain on women’s finances is caring for their aging parents. More women care for aging parents than men. However distasteful it may be to condense a daughter’s love for her parents into a discussion of money, this issue must be addressed so that women can prepare. Because of the aging baby-boomer population, these numbers will soon become staggering. If you add caring for young children into the mix at the same time, the financial results can be devastating.

What Should Women Do? Because of the special issues facing women, it is crucial that women educate themselves about finances and the realities of financial gender inequity and that they plan for their future. The male-dominated financial services industry is just beginning to realize the unique financial planning issues for women. Make sure that your trusted advisors understand these issues and are helping you plan accordingly. Don’t be afraid to ask your advisors questions, and obtain a financial plan from an advisor or online at eFinPLAN. Your financial plan will give you a complete picture of your current and expected future financial condition. You may also use our ‘what-if’ scenarios at any time to see how any change would affect your overall plan.

Important Information about: Disability & Long-Term Care Insurance

The old adage “your health is your wealth,” rings true when you consider the financial consequences of a major illness. This article explores two types of health insurance: disability and long-term care.

Disability Insurance covers your ability to earn an income, which is your single greatest asset. Disability insurance (also known as disability income or sick pay policy) is designed to pay an income if the insured is unable to work.

Disability insurance policies usually only provide coverage for a maximum of 60–70% of income replacement. When a disability occurs, the loss of income may be made up by government benefits, savings, or investments. Insurance companies will limit the overall amount of coverage, regardless of your income. This is because statistics show that the greater the amount of disability insurance people own, the lower the likelihood of their recovery.

Most people have some life insurance, as well as insurance on their homes and autos. In addition, a majority of Americans have major medical health insurance. However, when it comes to disability insurance, most people are uninsured or underinsured.

Remember to consider the taxation of disability insurance when calculating your disability coverage. If your disability insurance premiums are being paid pre-tax through an employer or a business, then the benefit will be taxed. Therefore, to estimate your total after-tax disability protection, you need to reduce the benefit by an estimated tax amount.

Many employers offer additional disability insurance for their employees to purchase at very attractive rates, and they provide the option to purchase it before or after tax. Consider employer-provided insurance as a low-cost alternative to individual insurance, and pay the premiums after tax since they are usually small. However, keep in mind that this coverage is not usually portable—that is, you can’t continue it if you leave your employer.

If you need additional insurance, consider obtaining several quotes. Your insurance agent will ask for your financial and health information to determine the amount of insurance for which you qualify. Disability insurance is not inexpensive compared to term life insurance because the risk of disability (morbidity) is greater than death (mortality), and the potential claims for a $2,000 monthly payout for a 35-year-old (if benefits are paid to age 65) totals $720,000.

The type of disability insurance policy and coverage amount you may qualify for depends on numerous factors, including your occupation. Ask your insurance advisor to obtain several quotes from well-rated insurance companies.

The following are some of the more prominent disability insurance features, benefits and riders:

  • Non Cancellable: Policy cannot be cancelled
  • Coverage/Benefit Period: Pay a benefit, usually until age 65, maybe 2, 5 or 10 years depending upon occupation. Limited lifetime benefit feature may be available.
  • Guaranteed Renewable: Premiums cannot be increased
  • Waiting Period: Period you must wait until disability income payments start (usually 90 days)
  • Residual/Partial Benefit: Percentage of benefits paid if you are able to return to work part-time
  • Offset: Most of your benefit should not be reduced if you receive other benefits; however, a social security disability offset is a common cost savings rider
  • Occupation and Disability Definition: Liberal definition of disability related to your occupation. Varies by company.
  • Other riders: Various riders to increase benefits

Long-Term Care Insurance has grown tremendously over the past decade because of population aging, longer life spans, the statistical likelihood of needing some care in an assisted living facility, and the astronomical cost of providing such care.

The dilemma of long-term care insurance is that it is expensive (easily costing from many hundreds for younger people to several thousands of dollars for older people). The adage is that the people that need the insurance, or those without sufficient assets to afford a nursing home stay, can’t afford it, and those that can afford it have sufficient assets to pay for a lengthy stay so they may not need it.

The average cost for a nursing home for full-time care exceeds $70,000 per year, depending on where you live. You can see how this would easily exhaust the savings of those of modest means.

Many people ask if Medicaid is an option. Yes, it is an option, but to qualify for it, you must be impoverished and in need of government assistance. Federal and state laws have recently become stricter, limiting people’s ability to legally shelter or gift money so that they qualify for Medicaid.

The types of long-term care insurance policy permutations vary greatly from company to company. The following are some tips for you to consider regarding your long-term care insurance needs.

  • Consider your family medical history. If there is a family history of needing long-term care or just of great longevity, you may want to consider purchasing it.
  • Consider your current age. Few people make long-term care insurance a priority in their 40’s. Cost goes up with age, so you may want to consider purchasing it while young and in good health, preferably in your 40’s up to your early 60’s, after which it becomes pretty expensive, but it still should be considered.
  • Find an insurance agent that specializes in long-term care insurance.
  • Obtain several quotes with different types of policies and coverage amounts.
  • Obtain the insurance company’s financial ratings. Most insurance agents should be able to provide this information for you.
  • Be leery of low-premium policies being marketed without an agent through the mail, from companies with unfamiliar names.
  • Do your research before buying. Obtain information from AARP and your state’s department of insurance.
  • Obtain a financial plan, perhaps with eFinplan, to examine your actual needs for this type of insurance and your overall financial health.
  • Never buy any type of insurance without first consulting your overall budget and financial plan.

Key Long-Term Care Insurance Issues

  • Coverage: Long-term care policies can pay for nursing home care, home care, assisted living, adult day care, and for family or friends to provide care at home.
  • Daily or Monthly Benefit: This is the amount of benefit that the insurance company will pay, regardless of your actual costs.
  • Elimination or Waiting Period: The period in which you must pay all of your long-term care expenses out of your own pocket before the insurance policy kicks in. Longer waiting periods usually lower your premiums.
  • Benefit Period: The length of time that you will receive benefits from your policy. You can choose a benefit period for various lengths of time or for life. The longer the period, the higher the premium will be.
  • Inflation Protection: A rider that increases your benefit depending on an inflationary factor to address the escalating costs of providing health care. Without this rider, you can become quickly underinsured. Insurance companies provide several options,

Secondary Items

  • Eligibility Description: Make sure the policy clearly explains when eligibility for coverage begins and how it is determined.
  • Hospital Stay Requirement:  Check to see if the policy has a requirement that you spend time in a hospital before receiving benefits. Try to avoid this condition.
  • Renewable: Will be renewed as long as you pay the premiums; coverage can’t be cancelled.
  • Rate Increase: Ask the agent to provide the company’s history of rate increases.
  • Waiver of Premium: Rider that pays the premium once you begin receiving benefits.
  • Deductible: Has one deductible for the life of the policy.
  • Pre-existing condition limitation: Make sure that the policy automatically covers pre-existing conditions you disclosed on the application. The insurance company may put limitations on some conditions.
  • Inflation protection rider: Determine choices for inflation protection, including an automatic increase in your benefit on an annual basis or a guaranteed right to increase your benefit.
  • Ability to Lower Coverage: Check to see if you are able to decrease the amount of coverage if premiums become unaffordable.
  • Dementia coverage: Make sure that the policy provides coverage for dementia.

Summary. Long-term care insurance and disability insurance help protect you and your family from suffering significant financial loss. Talk to your financial planner and refer to your written financial plan. If you don’t have one, consider online planning with eFinPLAN to provide educational materials and an evaluation of your insurance needs in these areas. Always consult your trusted professional insurance advisor for more information.

5 Vital Issues of Financial Planning for College Education

 

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For many people today, having a college education is a base requirement for obtaining a higher paying career. However, college costs continue to increase many times the average inflation rate. Therefore, it is imperative to engage in College Education Financial Planning.

 

1.    Get a written financial plan.  Call a financial planner or obtain a written plan (e.g., with eFinPLAN) to organize all of your financial affairs and to plan for the future. Many people hope to pay for college; however, without a plan it is just a wish. The best way to plan for college is in the context of a financial plan that will help guide you simultaneously through all the moving parts of your finances. That way you will make more informed decisions about insurance, college and retirement–about all of the areas of your plan. A plan helps you avoid neglecting one area because you focused too much on another area. A financial plan will also help you spot trouble areas, such as too much debt, and will provide suggestions to improve your overall situation.

2.    Establish priorities and set reasonable goals.  A vital part of financial planning is establishing goals that are reasonable and setting priorities for your financial objectives. Doing so will provide clarity for your financial plan. Many people want to retire early and pay 100% of their children’s education, but it may be difficult for some people to do both. Some have as their highest priority paying for college, and they inadequately put aside funds for retirement. Probably he most reasonable goal is to provide funds for retirement first and secondly to put aside money for college education.

3.    Explore the different sources of funding. College costs are increasing at an alarming rate (see below), making it difficult for many people to fully fund for college. That fact should not discourage you from planning for or from attending college. Check out the article 14 Sources of College Funding and Calculators.

4.    Student financial education and management.  Students should be engaged in the process of planning, funding, exploring and applying for funding sources. Making students part of the process helps them to know and be informed about all of the issues, and it may open more doors to financial opportunities. Secondly, teach your children financial management, budgeting, and debt avoidance skills, so that when they go off to college they don’t add to the amount of debt they might have to incur.

5.   Set realistic goals that reflect your beliefs and make a decision you can live with: There are many options, but only you the parent(s) can decide what works best for you, your children and your family, and only you can make choices that reflect your values, beliefs and affordability. There is no one right way for everyone. Some people believe in paying for their children’s full room, board, tuition and books, and on the other extreme they feel the costs should be entirely paid by the student. Then there are those that fall in-between, either due to economic reasons or to philosophy. Consider your alternatives, talk to people who have been down this path before, evaluate the costs and effects on your overall plan, and look at your financial situation. Talk you your spouse, and consider the child as well, since each one of them is unique. Base your decision on this evaluation, and try not to bow to peer pressure. If you do, you’ll lose any control that you might have, and emotions and debt easily enter in.

Top 10 Financial Planning Tips for Having a Baby

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Having a baby requires a massive amount of preparation.  You must determine whether to paint pink or blue, rearrange work schedules, and buy strollers, cribs, car seats and every other baby necessity.  You must even decide on a name that the baby will carry for life.  As you are preparing, take some time to also prepare your finances.

1: Create a Written Financial Plan. Acquire a financial plan, perhaps an eFinPLAN financial plan. People don’t plan to fail—they fail to plan.  Having a baby is not only the perfect opportunity to create a plan for you.  It is also a necessity to help you survive one of the busiest and most enjoyable times of your life.

2: Create a Debt Reduction and a Monthly Cash Flow Budget Plan. Make a plan to reduce debt, and commit to incurring no new debt.   This way you can earmark savings for the things you will want and need, instead of buying them on credit.

If you don’t have a budget, it is a necessity that you create one now.  You will want to estimate the new expenses for day care, baby sitting, food, diapers, neonatal medical care, etc.  Be sure to calculate changes to your income if one of you may quit a job or cut back to part-time.  You may run ‘what-if’ scenarios in your financial plan to determine the impact of each decision.

3: Update Wills and Beneficiary Arrangements. When you have children, it is essential that you put your plans into writing in case either parent dies.   In addition, change life insurance and retirement plan beneficiary arrangements to reflect your new estate plans after discussion with your financial and legal advisers.

4: Update Life and Long-Term Disability Insurance. When you have children, your need for life and long-term disability insurance will increase.  Your financial plan will help you determine whether there are any deficiencies in your insurance needs.  Use your financial plan as a discussion tool as you meet with your trusted insurance provider.

5: Know Your Health Insurance Benefits. Study your health insurance policies to know exactly what your possible out-of-pocket costs are going to be for prenatal and postnatal care, and for birth.  Carefully study your policy so that you use the right in-network doctors and hospitals.  Also, some people actually time pregnancies so that their deductibles are met within a coverage year.  For example, if you had paid medical deductibles and co-insurances in one coverage year for tonsil removal, it may be to your financial advantage to have pregnancy in the same coverage year. Obviously, this is not always possible.

6:  Know Your Maternity-Leave Benefits. Study your employment manual to know your company’s policies for maternal and paternal time off.  Some companies have to comply with certain legal requirements.  In addition, you may be able to use some sick and vacation time.  You may want to try to time the pregnancy is such a way to maximize time-off and medical benefits.  For example, if you have the baby at the end of the year, you might be able to use some time-off benefits from both calendar years.

7:  Day Care and Baby Sitting.  If you are going to use a day-care center or a private baby-sitter, be sure to investigate the cost early on in the pregnancy, and include those numbers in your budget projections.

8:  Budget for Essential Baby Buys. Create an inventory list of necessities, such as changing tables, diaper pails, bottles, breast pumps, monitors, and child car seats, to mention a few.  It is amazing that anyone ever raised children without all of the latest conveniences that are now deemed necessities.  Hopefully, you will have a nice baby shower to provide the essentials.  If not, and if you are on a tight budget, you might need to receive safe hand-me-downs or to shop for bargains or at thrift stores.  Never buy a used car seat, as it may have been damaged or it may be too old to meet current safety standards. Also, check safety standards for used cribs.

9:  You Don’t Have to Buy Everything. You will feel the pressure to be perfect parents, to buy everything to help you be the best parents and to raise the best kids in the safest environment, capturing every moment.  Make wise decisions about what you really need.  The process of determining needs versus wants for your child will continue for about the next 18 years.  It seems as if the inventors just keep inventing the latest camera, learning tool or safety device.  Remember, these are not all necessities, and you will still be a good parent even if you don’t have the latest of everything.  Some of the happiest adults I know grew up in modest income families, while some of the least productive adults are those that grew up with every privilege.

10: Use Advisers. Life is complex, and the only way to sort through the confusing maze is to utilize experts.  Find and use trusted professional advisers: legal, tax, insurance, investment, and financial.  Regarding time-off and medical benefits, be sure to read your benefits books and consult with your insurance adviser, employee benefits or human resources personnel for guidance.

Summary: Having a baby is one the most joyful times of your life, and it is a wonderful opportunity to plan together what you want for your child, your family, and your future.

5 Financial Steps to Buy a House

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Homes are the single-most significant purchase consumers make. Your knowledge and skill in making an excellent house purchase decision will contribute to helping you reach your other financial goals. This primer contains financial planning information to help prepare you for the buying process. This preparation phase is perhaps the most important phase of the home buying decision.                                                                                                                                                                            

Step 1: Get Your Financial House in Order. Before you even think about the purchase of a home, look at your entire financial picture: your comprehensive financial plan. The purchase of a house affects not only the amount of money you currently have in savings and investments (if you use some of it as a down-payment), but the payments, maintenance, utilities, and costs to furnish and insure will affect your budget each month. Home buying decisions will affect your ability to reach your other financial goals, more than any other large purchase that you make.

Your decision process should begin by looking at your financial plan. If you don’t have a financial plan, consider an online eFinPLAN financial plan. Before embarking on the road to a big financial decision, it is key to get your financial house in order. The decision to purchase a home should not be made in a vacuum. It should take into consideration all of your financial goals and responsibilities. When you purchase the home, you should know how it will affect your other priorities. If the home will cost you, over time, less than you can afford, then you will be able to use those extra funds for other things, such as getting out of debt sooner or retiring before you thought that you could. It might mean that you are able to afford a vacation without using credit cards and going further into debt.

As with all financial decisions, this one should revolve around the written plans that you have made for your future. Check your budget to see if you will be able to see your gross and net income and to estimate how much you have left over to invest.

Step 2: Examine Financial Aspects of Home Purchases.The following is a list of the most common areas for consideration when purchasing your home. Make sure you discuss these with your Realtor or buyers agent. After all, it’s their job, so use all of their expertise.

  1. Insurance: Ask your insurance agent the approximate cost to insure the homes you are considering buying.
  2. Utilities: If you are renting now, your budget for utilities will likely go up. Your utility usage will depend on: the costs for utilities in your area, the size of the home, the age of the furnace, the type of heating, and the level of insulation in the home. Be conscious of these expenses while looking at homes, and if you find a home you like, the listing should provide the budgets for gas, electric, or heating oil.
  3. Payments: How much are you currently paying for your house or apartment? It is usually less than you will pay for a new house payment. Use internet loan calculators to determine approximate monthly mortgage payments. Avoid the temptation to spend more than you can really afford for a home, assuming that your income will increase over time. If you want to be in excellent financial condition, buy a home a few notches below your current income level. In most instances, the loan interest will be deductible; however, do not use this as an incentive to over buy.
  4. Inspection: Prior to buying a home, the buyer should hire an excellent home inspector to go over the home with a fine-toothed comb. Arrange to be there during the inspection.
  5. Maintenance: If this is your first home, talk to other homeowners, friends, and family to help you estimate the cost of maintaining the prospective home.
  6. Repairs: Estimate the cost for future repairs such as roof replacement, outdoor painting, concrete repair, basement repair or finishing, and major mechanical replacement. Work with friends, family, contractors, and the inspector to help you estimate future repair costs. You can plug these large expenses into your financial plan under the ‘large future purchase’ section to help you budget for these large future expenses.
  7. Real Estate Taxes: Make sure you know what real-estate tax costs will be in the areas that you are considering. They can vary quite a bit, they can go up very quickly, and they may make a big impact on your budget, so do your homework prior to making your final decision.
  8. Commuting Costs: If your commute will be longer as a result of moving, estimate the additional cost of fuel and maintenance for your car.
  9. Homeowners Association and Condominium Fees can be high in some areas. Make sure you know all the fees before buying.
  10. Real estate agents and buyer’s agent: Real estate agents represent the seller, not the buyer. Some people recommend hiring an agent who works for you, not the seller. However, I have had excellent experience working with a real estate agent for many years. Whomever you decide to work with, make sure you know all the services they will provide for you.
  11. Comparables: Get prices on other homes. Real estate agents call them “comps.” Knowing the price of other homes in a neighborhood will help you avoid paying too much. Remember the old real estate advice that it’s better to buy the least expensive home in a great neighborhood.  Also consider whether any changes you want to make to the home would render it incomparable with the neighborhood.

Revisit Your Financial Plan: Use the data you’ve gathered to sit down and look at your financial plan to determine whether the mortgage payment (including the extra costs listed above) will positively or negatively affect your financial condition and any impact it might have on your other goals.

Step 3: Choose between New Build or Existing Homes. Many home buyers choose new homes because the price may be close to an existing home and because older homes require more maintenance. However, if you purchase a new home, it may not have the features that existing homes may have, such as added patios or decks, installed draperies or blinds, security systems, lawn sprinkler systems, seasoned landscaping, finished basement, and simple things like hooks and shelves. These extras can make an existing home a great buy, especially if you are just starting out or if money is tight. Building a new home can be a hassle (especially if you are inexperienced with the many questions you need to ask) and the wait to build can be long.

In addition, some buyers choose new homes because of financing options, without fully understanding all of the details, and then they find themselves in a situation where the mortgage payment increases more quickly than they planned.  Any changes or upgrades to a new home floor plan will raise your costs dramatically. Existing homes sometimes have more character as well as established neighborhoods and schools; however, they may need more repairs or have undesirable floor plans. Many home buyers choose new homes because they dislike making repairs of any kind, then find themselves installing blinds or shelves each weekend. We have loved living in an older home and in a home we built. Both have required different kinds of projects and expenses. Think through your decision, perhaps journaling the pros and cons of different homes or builders you visit to help you decide between a new or an existing home.

Step 4: Financing Your Home.  There are two types of conventional mortgage rates: fixed and variable. If you choose a variable rate, make sure you know all the variables and conditions. If you have a variable rate loan and interest rates go up, you can usually convert to a fixed rate loan. However, if you convert when interest rates are rising, your rate will be higher than what it would have been if you had started with a fixed rate loan. Discuss your options with your banker and your Realtor.

There are also other types of financing plans, such as interest only loans, which are appealing to many people because it may help them afford the payments on a much larger house. It is also appealing to people who are only planning to live in a house for a few years. Interest only loans are popular when homes are appreciating rapidly, as they were up until recently.  In many parts of the country, home values are not appreciating as much or depreciating significantly, therefore interest only loans should be approached cautiously.

Most people choose a 15- or 30-year mortgage. Monthly payments will be higher for a 15-year loan, but you will be able to pay it off obviously sooner than a 30-year mortgage and you’ll save a lot in interest. The interest rates and expense for 30-year mortgages is higher in the long run, but these loans are usually more affordable in the monthly budget and generally allow you to take an extra 15 years of interest deductions, assuming you do not pay off the loan early. Discuss your individual situation with your banker and your tax adviser.

Step 5:  Closing

  1. Home Purchase Negotiation and Closing is very important. Your Realtor can help you with this. When interviewing potential Realtors, discuss their depth of knowledge and experience in this area.
  2. Always use an attorney to review the documents you are signing, especially at closing. There are just too many things to sign, and it helps to have someone else paying attention to what you’re signing when you consider the risk of agreeing to something—in writing!—unaware. Before closing, send all the documents to the attorney for prior review, or ask your attorney to attend the closing with you.
  3. Do not be ‘House Poor’. As a rule of thumb, your home budget (including mortgage, escrow, condo or homeowner’s association fees, etc.) should not exceed one fourth of your monthly budgeted expenses. Bigger houses are more expensive to furnish, maintain, landscape, and heat and cool, taking a bigger bite out of your overall budget. Many people may encourage you to buy as much home as you can afford now or will soon be able to afford. Perhaps they have reminded you that you have a successful job, and besides you can always cut back on eating out or going on vacations. The approximate mortgage amount you have been given will make things tight, but you really love that house. Now stop and take a deep breath. Is this mortgage amount within the comfortable range you have determined after reviewing your financial plan? If you own a home that cost less than what you can afford, then your financial life will be much less stressful. You will be able to work toward the goals you have established in your financial plan. Often, the greatest source of financial setback, causing people to use up their savings and go into debt, is unexpected expenses. Living below your means with a comfortable mortgage payment will help you plan for your future and the unexpected setbacks of life.

Summary: We have provided information about home buying and other areas that will affect your financial condition. These informational articles, along with your financial plan, are designed to help you take control of your financial future. This general informational material is designed as a list of reminders for homeowners and as an informational tool for first-time home buyers. Making a great home purchase decision that falls in line with your financial plan takes time, energy, self-education, and a great deal of patience. Since homes are the largest purchase for most consumers, it is an especially important financial decision. It is our hope that you will end up in a comfortable home with a painless payment, surrounded by great neighbors and friends.

Top 10 Financial Planning Tips for Engaged and Newly Married Couples

CelebrateAre you soon to be married or recently married? Did you know that money is cited as one of the root causes of divorce? Following these financial planning tips may help you avoid money traps in your relationship.

1: Create a Written Financial Plan. Acquire a financial plan, perhaps an eFinPLAN financial plan. Having a plan gives you the road map to help you figure out your present financial condition and to plan your future goals. People don’t plan to fail—they fail to plan. Getting married is the perfect opportunity to create a plan for you to follow together for the rest of you lives. Dream together and make it fun.

2: Inventory Assets and Debt. When you marry and combine households, inventory your household goods and sell or give away duplicate items. Similarly, create a joint inventory of the assets and debt that each of you brings into the marriage. This is a good starting point before you embark upon debt reduction and wealth accumulation strategies. It is good for communication, too, to avoid surprises later.

3: Create a Debt Reduction Plan.  If either partner brings debt into the marriage, consider strategies to reduce credit card and consumer debt. Then commit to keeping debt at a minimum for the rest of your married lives. Low debt is healthier financially and will help you avoid the added marital stresses that a heavy debt burden brings.

4: Understand Different Spending Patterns.  If the spending habits within a relationship differ greatly, this may be one of the more difficult adjustments to make together, but if you can identify each person’s spending patterns initially and establish strategies for compromising, marital harmony will abound.

Some people are impulse buyers and others are misers, never wanting to spend any money, and then only if the item to be purchased is on sale. Regardless of how far apart you are, agreeing to work on it together early in marriage is a lot easier than agreeing later—after the disagreement has festered.

Younger couples might need to remember that once you are married your lifestyle may change. You may have become used to a certain lifestyle that was either afforded to you because of your parent’s hard work or as a result of your single state. However, just starting out, your standard of living may well change. If you accept this before you get married, you may be able to avoid debts you might otherwise incur.

5: Create Future Goals: Together and Individually. Following a written financial plan can save you from a lifetime of mistakes and failures. It is important on many levels that you create goals that you want to achieve both together and individually. Understanding these goals early and developing plans that complement each other instead of fostering competition will go a long way towards marital harmony.

6: Update Wills and Beneficiary Arrangements. Make sure you create new wills when you get married, and change beneficiary arrangements on life insurance policies, retirement accounts, and transfer-on-death accounts.

7: Equal Assets? Blended Family? If either partner brings substantial assets into the relationship and/or if there are other children from previous relationships, you should discuss premarital agreements and estate planning with your attorney and financial advisers. Financial planning is more complex if these apply to you; therefore, careful planning may be warranted.

8. Create a Monthly Cash Flow Budget. A monthly budget coupled with your financial plan will enable you to accomplish the goals you have for debt reduction and for saving for home purchases and things such as retirement. In addition, a budget helps control overspending and imprudent use of debt.

9: Use Advisers. Life is complex, and the only way to sort through the confusing maze is to utilize experts. Find and use trusted professional advisers for legal, tax, insurance, investment, and financial advice.

10: Increase Financial Literacy. Commit to learning about all areas of financial planning, including investing, insurance, debt, and budgeting. It is important for you to be in control and informed. Ultimately, you are in control of your finances. The better informed you are, the better decisions you will make.

Summary:   The beginning of your marriage is a wonderful opportunity to plan your future together. Planning will go a long way toward helping you lay the foundation for a successful marriage with harmony in your financial decisions.

Part 3: How to Follow and Stay on Budget

 

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Budget Part 3

 

Prior articles discussed 1.) Why you should have a budget  2.) What is a budget and how to get started. This article discusses how to follow a budget each month.

Most people easily grasp the first two articles, but few people actually follow or stay on budget. For people who really need a budget but ultimately fail to stay on one for the long-term, this article may be helpful.

Contract with Yourself (and Spouse). Tracking spending and staying within spending limits is very hard for many people; therefore, it helps to have a contract with yourself. If you are married, this agreement should include your spouse. If you work together, you will accomplish more than you could on your own.

  1. I will start a budget, and I will pay attention to it weekly and monthly.
  2. I will not spend more money than I make.
  3. I will be in financial partnership with my spouse with no secrets between us.
  4. I will not borrow to purchase items that depreciate in value.
  5. I will not let my emotions make me purchase anything, including gifts.
  6. I will not buy something that costs more than $50 without consulting my spouse, our budget and our financial plan.
  7. I will not purchase something that exceeds my budgeted amount unless it is out of my control (i.e. utilities, emergency medical expenses, car repairs).
  8. I will not purchase anything that I don’t really need, no matter how good the sale is.
  9. I will not purchase something to keep up with the Joneses.
  10. I will not purchase high maintenance items (i.e. pet, hobby) if I can’t afford the expenses that come with them.
  11. I will not apply for any new credit cards unless they have a lower interest rate than my current card.
  12. I will pay off all credit cards monthly (I will work toward paying accrued balances off, and I will never carry a balance again.
  13. I will not spend money on fun things unless I have paid my monthly bills.
  14. My spouse and I will both be the “fun police”, helping each other determine whether an expense is justified.
  15. I will include children in the budgeting exercise so that they learn restraint from our example.

Cash Flow Management Tips & Money Savings Tips. In addition to having good budgetary habits, it also helps to take advantage of money-saving measures. The following are a few of the things you can do to help you save thousands of dollars per year.

  1. Tax Advisers:  Use tax advisers to avoid overpaying taxes.
  2. Investments:  Utilize investments that have low to no commissions, fees and expenses.
  3. Borrowing:  Shop around for the lowest interest rates.
  4. Insurance:  Consult your eFinPLAN financial plan to determine the insurance you need, and meet with a professional insurance adviser to help you find the lowest prices possible. (eFinPLAN is not an insurance provider.)
  5. Living Smaller:  Live a lifestyle one to two notches below your income bracket. Smaller homes and cars, and fewer belongings require less money to maintain and insure.
  6. Low Price Travel: Camping or lower cost destinations (or off-peak weeks) often are more enjoyable than expensive resorts and tourist destinations.
  7. Transportation:  Transportation consumes a large percentage of family income; see the Transportation and Commuting article in the eFinPLAN blog.
  8. Food:  Pack your lunch, eat out less often and at less expensive establishments, avoid expensive beverages when you eat out (such as coffee), and shop at the least expensive grocery stores.
  9. Identify Wants versus Needs:  Because of quick credit extended to the last generations, people have learned to live above their means on a regular basis; therefore, many of us need to learn to identify what wants and needs really are. For example, having a manicure or buying season passes to your favorite sports franchise may be difficult to justify unless you can afford it.

Tips for Organizing Your Budget                                                                           

  1. Use technology or spreadsheets:  Obtain software (or use spreadsheets) that will help you pay bills and make and monitor a budget.
  2. Devote time to it:  Keep track of all expenses and enter them into your software program or monthly spreadsheets each week. Use services like Mint.com (free but they sell you {your information}, or Ynab.com, one-time small cost for PC and smart phones.
  3. Save all receipts, bills, household documents, and tax documents: Organize these items by category into an accordion file or drawer: e.g., auto, bank, business, credit cards, dental, medical, grocery, income, insurance, mortgage, utilities, general receipts, school information, and taxes.
  4. Balance your checkbook:  It is amazing how few people balance their checkbooks monthly. Budgeting software makes reconciling simple, but you can read the back of your statement or make an appointment with your banker if you need to learn to do this skill manually.
  5. Tax Time:  If you use budgeting software, you can run a tax summary report before you work on your taxes. If not, and if you itemize your taxes (Sched.A), you must total the appropriate columns in your spreadsheets, e.g., Medical expenses (Your accountant may provide you with an organizer to help you get ready for tax time).
  6. Set Expenses:  Remember to place quarterly and yearly expenses on the appropriate month in your budget so that you do not overspend. For example, annual insurance payments, quarterly tax estimated payments, annual homeowners association dues, etc.
  7. Debit Cards for couples:  Debit cards can make monitoring your spending very difficult, especially if both you and your spouse use one for the same checking account. Each spouse should regularly enter receipts into the budget spreadsheets or software and communicate any unexpected or extra expenses.
  8. Debit Cards for singles:  Make sure that you are entering each receipt into the budget weekly and/or enter each amount into your checkbook as you make purchases. Be careful of overspending with this convenience.
  9. Education for your children:  Remember to include annual expenses in your budget for ‘pay to play’ fees, sports or school uniforms, school books and lab fees, pictures, etc. We usually budget around $600 in August to pay the public school fees for two children. Budgeting becomes even more crucial when a child heads off to college.

Other Practical Tips.  In addition to having good budgetary habits, it also helps to take advantage of money-saving measures. The following are a few of the things you can do to help you save thousands of dollars.

  • Break Habits:  Smoking and excessive eating of pre-prepared and fast foods costs thousands of dollars per year.
  • Monitor Emotions:  Shopping provides only a temporary relief from depression or stress. The real stress begins when the bills arrive.
  • Support Groups: Support groups for individuals with compulsive behaviors may be offered at a low cost (or free) by community centers, the YMCA, or churches.
  • Library: Educational: Obtain books from the library from their large inventory of resources about budgeting, financial planning and spending less.
  • Library & Entertainment:  Obtain good books and DVDs from the library for a source of free entertainment.
  • Reduce or Eliminate Cable TV:  If you are in financial crisis, eliminate cable or other cost-based TV. If you do not want to do this, consider reducing channels to the basic programming. Your quality of life may go up by having less TV in your life when you consider some household’s over-consumption of news, violence, and sexually-oriented programming.

Summary: Good cash flow management is key to implementing any financial plan; commit to doing this well. No one likes self-discipline, but it is actually good for us. With proper management of your finances, you will become more confident and less stressed about your future. Remember, one bad financial decision can sometimes take years to undo. Be very careful with all decisions you make.                                                                                                                                                                      

The way to achieve good cash flow management is to:

  • Create a comprehensive financial plan from eFinplan.com.
  • Implement that plan using your team of trusted professional advisers.
  • Monitor your plan regularly to keep track of your progress towards achievement.

This is the final article of a 3-part series:

Part 2: What is a Budget? and How to Start a Budget

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Budgeting Part 2

What is a budget? Simply put, a budget is a monthly spending plan for your money.

Budgeting made simple, fixed versus variable expenses: Even more simply put, it is a spending plan for your expenses that are not fixed. Fixed expenses are things that stay the same each month. For example, your rent and mortgage amount is the same every month. Utilities, cable and cell phone bills are often pretty much the same from month to month. Non-fixed or variable expenses are those that can vary quite a bit each month, such as eating out at restaurants, shopping for clothing other things, entertainment, gifts, and vacations.

Simple but not easy: That phrase has always been an inside joke in our house. It seems as if fixing things on the car or house if you are a handyman can require many trips to the hardware store. My son reminded me of this family expression once when I was being frustrated while replacing a battery in my car. It was a rather simple procedure, but little things kept breaking, or I needed a little different tool. Several trips and half a Saturday later, my son reminded me–yep, simple but not easy. Budgeting is kind of the same way. It is fairly simple to follow the steps I will cover in a moment, but it is something altogether different to learn to live within the budget and to track spending along the way.

7 Steps from having no budget to preparing to build a budget. If you have no spending plan or budget at all, you may be wondering how to start.  Well, it is pretty easy, if you will follow these 7 steps:

  1. Make a pile: Gather your bills, purchase receipts, ATM receipts, credit card statements, and checking account statements.
  2. Organize your pile into months so that you can sort them.
  3. Estimate your monthly expenses by looking at the information you have organized. This is an educated guess for your variable expenses, but that is okay to get started.
  4. Add up your expenses. You can either use paper and pencil or a spreadsheet, like the one we created for your use. The free online, massively popular Mint.com is used by many to track spending. Get this Excel document for Mint. This document is an easy way for you to estimate what you think you are spending. This works well for your first attempt to design a budget, and it has many of these instructions built into it. If you have an eFinPLAN account, it has a simple monthly budget estimator too.
  5. Compare expenses to your income. This spreadsheet will automatically add up your expenses and compare them to your income. If you are at a deficit (spend more money than you make), then you can easily identify where you are overspending, and therefore where you need to cut back.
  6. What to do with disposable income. If your income exceeds you expenses, now is the time to make strategic financial plans. Evaluate the deficiencies in your financial plan. You might need to eliminate debt, save for emergencies or car replacements, or invest for the long-term, for example, for retirement.
  7. If you have no savings, the first thing you should do is to save money for rainy days. Your car will break down, you house will need repairs, and every now and then it will not be for a small amount. If you have not set aside money for this, you most likely will have to borrow it or use a high interest credit card. If you already have debt you need to eliminate, many experts recommend accumulating $1,000 before paying off all your debt. Once your non-mortgage debt is eliminated, save 6 to 9 months of expenses. Having this cushion will help you weather storms such as job loss or an expensive health care bill.

The most important step to cash flow planning is to track your spending so that you spend within the limits you have set for yourself. This can be done with paper and pencil, a spreadsheet, software or an app such as Mint.com. With the Excel document described and linked in this article, you can set up your Mint account very well to begin with and track spending on your PC or Smartphone from now on.

In summary, this article describes quite well what a budget is and how to get started. Other articles here outline how to follow and stay on budget for the long term. Budgeting or cash flow planning is foundational work, for your financial planning.

This is the 2nd article of a 3-part series:

Part 1: Why You Should Have a Budget
Part 2: What is a Budget? and How to Start a Budget
Part 3: How to Follow and Stay on a Budget

Part 1: Why You Should Have a Budget

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Budgeting Part 1

Cash flow management is especially important today as Americans are saving less and are further in debt than at any other time in our history. Let us explore why you should have a budget. The number of people that have and follow a budget is only about 33% of people today in the U.S.

Cash Flow Management Defined: Cash flow management is the management of income and expenses both current and forecast for the future. The old-fashioned name is budgeting, and if you spent more than you earned, it was called going broke. Now we call it negative cash flow.

You should have a budget if you…

  • Live paycheck-to-paycheck.
  • Borrow too much money, and have no disposable income after paying fixed expenses (like rent or mortgage) and buying food.
  • Are constantly stressed about money.
  • Are not making the necessary progress saving for retirement, college education and car replacements.
  • Have no money in savings for emergencies, and major car repairs are a crisis.
  • There is no money left over after paying bills.
  • You have no idea how much you can spend to eat out, for groceries, and on entertainment; you just spend what seems natural.
  • Answer Yes to more than one of the above!

Smart people manage their cash flow because they know they…

  • Have Limited Income: Virtually everyone has limited or fixed income. Without budgeting you are being controlled by your environment. If you have a plan, you are more in control of your money. Without a budget, you may not really know you are spending more money than you are earning.
  • Need Spending Limits: Knowing what your monthly expenses are projected to be and what they actually are will help you keep track of how much money you have left over for future goals and needs.
  • Have Unlimited Demands: There is an endless demand on your finances. Our commercial capitalistic society is constantly calling out for you to buy. If you have minor children, the demands are greatly increased by the things they want, the activities they are in, and the schools they attend.
  • Want Freedom, Not Bondage:  Budgeting seems to be restrictive to some people. The reality is that we have to make choices between what we want at the moment and our regular bills and goals for the future. However, there is freedom in knowing what your limits are. Many people find this liberating, because it creates opportunities to grow and mature.
  • Have Future Goals:  If you are sacrificing today, it helps to know what you are saving for in the future. By having an eFinPLAN financial plan, you will know what your goals are and for what you are saving.
  • Want to be More Aware of Where Money is Going:  If you do not have a budget, you may have no idea where your money is going. Knowing where you money is going will help you identify if you are spending too much money in specific areas.
  • Want Less Stress:  Spending without a plan and a budget increases your stress because you do not have a well thought out plan for paying your bills and you may spend more money for fun than you can afford. Planning and budgeting will give you the peace of mind that you are on the right track.

Summary: Only a small majority of people can live on no budget at all. A few people are able to control spending, and they spend very little each month. The majority of people need some kind of cash flow management system, or a budget to track their income and expenses. Knowing that you need and want a cash flow plan is the first step in the right direction toward designing a budget plan.

This is the 1st article of a 3-part series:

Part 5: Is Suze Orman Right: Can you do your own financial planning?

Suze Orman says: Do Your Own Financial Planning! “I think it’s imperative for you to do as much of the work as possible, rather than turning control over to someone else: your finances.” Ms. Orman and I agree on this. Is this really true, and what does this mean?

I think the biggest thing Suze Orman can be accredited with is her encouraging and empowering people, especially women, to take responsibility for their personal finances. Her advice and message isn’t particularly sophisticated; she doesn’t get into a lot of the minute financial details. But her positive motivation with basic financial wisdom helps people to become more engaged and make better decisions.

Suze definitely believes people can and must take control of their overall personal financial situation in the broad sense, and that includes knowing and making good decisions with its various parts, from insurance to 401(k), and from budgeting to debt elimination. We, she, and other financial personalities recommend this. However, in the professional context, can people be their own financial planners? My answer is, of course. Everyone is intelligent enough and capable of learning and doing their own planning.

What is a professional financial plan? I defined financial planning in a prior article, but to summarize, a financial plan is a written personal road map to financial goals. It covers virtually all areas of one’s finances. It is both an organized snapshot of where one is, and a plan to where one wants to be. A financial plan will cover virtually all areas, such as retirement, college education planning, investing, and more than 50 other areas.

Until recently, people could only obtain comprehensive financial plans from professionals. They either pay a fee or agree to be presented with a financial product that would pay the planner a commission. But now, companies like eFinPLAN can offer online financial planning, for a very low-cost, and with no product bias.

DIY: The advantages of do-it-yourself financial planning

  • Engages you in the process, which gives you a great sense of responsibility and the confidence of being ‘in-the-know’.
  • Forces you to organize your financial records and affairs.
  • Helps you become financially smart because you will learn much during the planning process as you see how various parts of the plan and your results are connected.
  • Gives you a better understanding of how to use trusted advisers so you can relate to them at a higher level.
  • Helps remove the intimidation factor of working with financial professionals and helps you detect when they may not be working in your best interests.

Implementation of a financial plan is the most important part of financial planning. This begins after you have input all of your financial information into the financial planning software application, and it produces a complete and personal planning report for you. You then use the report to help guide you in implementing the its steps, such as in the areas of insurance or retirement planning. You have a whole host of ways to go about acquiring products for your plan, including many options from online financial, tax and legal firms. You may choose to use local advisers or online ones, and they may try to provide second opinions. This can be helpful; so be open to this. However, by doing your own online financial plan, and acquiring all of the learning, education and engagement, you are much better equipped to process and judge what is presented to you.

In summary: Suze Orman is right, you can and should take control of your finances, and put yourself into the driver’s seat of your financial planning. You are smart, intelligent, and capable, and with the number of excellent web-based firms today, you can do a lot of it yourself, saving you time and money in the process.

This is the 5th and last article in a series about financial planning:

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